Kuwait Bank Lending Subdued on Spending: Arab Credit

(Corrects to say Global Investment House restructured debt in 2009 in sixth paragraph in story first published July 27.)

The pace of Kuwaiti bank lending is slowing this year as delays on government projects and loan defaults by local investment companies hamper demand for debt in OPEC’s fifth-biggest oil producer.

Loans to the private sector and banks’ investments in bonds in Kuwait grew 0.3 percent in the first six months of 2011, after a 1.9 percent increase in 2010, according to data on the website of the nation’s central bank. Lending grew faster in neighboring Saudi Arabia, the biggest Arab economy, and in the United Arab Emirates and Qatar, as the region recovers from the impact of the global credit crunch.

Lawmakers in the Persian Gulf nation have sought to question Prime Minister Sheikh Nasser Al-Mohammed Al-Sabeh over delays in the implementation of a 30.8 billion dinar ($113 billion), four-year plan approved in February last year aimed at modernizing and restructuring Kuwait’s oil-based economy. Some of the country’s nearly 100 investment companies defaulted amid the credit crisis after the value of their assets collapsed and frozen debt markets prevented them from raising new loans.

Photographer: Tang Chhin Sothy/AFP/Getty Images

Kuwaiti prime minister Sheikh Nasser Al-Mohammed Al-Sabah. Close

Kuwaiti prime minister Sheikh Nasser Al-Mohammed Al-Sabah.

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Photographer: Tang Chhin Sothy/AFP/Getty Images

Kuwaiti prime minister Sheikh Nasser Al-Mohammed Al-Sabah.

“The oil sector doesn’t need much external funding and without any aggressive non-oil expansion the demand just isn’t there,” Khalid Howladar, a senior credit officer at Moody’s Investors Service in Dubai, said in an e-mail yesterday. The problem with bad loans at Kuwait’s investment companies “are still being worked through and this overhang is still a source of uncertainty for the banks there,” Howladar said.

Muted Growth

Kuwait’s government was forced to guarantee local bank deposits in 2008 as the global financial turmoil affected Kuwaiti banks and investment firms.

Investment bank Global Investment House KSCC restructured $1.73 billion of debt in 2009, while Investment Dar Co., the owner of half of Aston Martin Lagonda Ltd., has altered the terms on $5 billion of loans after defaulting in 2009. Finance company International Investment Group KSCC missed periodic payments on a $200 million Islamic bond in 2010, while Aayan Leasing & Investment Co. signed an agreement with nine creditors to reorganize $741 million of debt in May.

The three-month interbank interest rate in Kuwait has been at 0.8125 percent for most of the past three months, close to the lowest on record, according to data compiled by Bloomberg. Only Saudi Arabia’s interbank rate has been lower in the region, at 0.6 percent. The rate was 1.49625 percent in the U.A.E., 0.981 percent in Qatar and 1.225 percent in Bahrain.

Government Spending

“Loan growth in Kuwait remains muted with delays in the implementation of development projects,” Goldman Sachs Group Inc. analyst Waleed Mohsin, said in a report on Commercial Bank of Kuwait SAK on July 25. “We expect government spending to drive credit demand in Kuwait” amid speculation half of the country’s four-year development plan will be financed by banks, Mohsin said in a research report May 25.

Kuwait’s government is budgeted to increase spending by 11 percent in the fiscal year through March 2012, partly to cover projects in the plan. Spending in the budget is forecast at 19.44 billion dinars, the highest in Kuwait’s history. The country had a preliminary budget surplus of 8.6 billion dinars in the 2010 to 2011 fiscal year, its 12th consecutive surplus, as oil revenue was more than double the government’s forecast.

Kuwait produced 2.49 million barrels of crude oil a day on average in June, 8.5 percent of OPEC’s overall output, according to Bloomberg estimates. Crude oil for September delivery slid as much as 54 cents to $99.05 a barrel in electronic trading on the New York Mercantile Exchange today.

Outlook

“Without urgent and rapid capital spending on various state projects, there will not be good growth,” Salem AbdulAziz Al-Sabah, governor of Kuwait’s central bank, told CNBC Arabia Television in a July 19 interview. “Without providing good investment opportunities to the private sector to enable it to expand its local financial activities, the future outlook will be limited.”

National Bank of Kuwait (NBK) S.A.K., the country’s biggest lender, reported a 4.5 percent decline in second-quarter profit amid a “weak operating environment,” the bank said on July 12. Its non-performing loans to gross loans ratio declined to 1.61 percent at the end of June from 1.81 percent a year earlier, the bank said. Kuwait Finance House, the country’s largest Islamic bank, reported a 43 percent drop in second-quarter profit.

Development Plan

Lending will not accelerate “unless the development plan starts to kick-in and in my view, this won’t happen for several more months,” Michel Accad, the chief executive officer at Gulf Bank KSC (GBK), said in an e-mail. “Companies and investors have also been reluctant to borrow and invest in their normal course of business, due to the economic uncertainties.”

The premium investors demand to hold Middle East Islamic and non-Shariah compliant bonds over U.S. government treasuries has widened 9 basis points this month to 253, according to the HSBC/NASDAQ Dubai Middle East Sukuk/Bond Index. The premium to hold emerging market sovereign bonds widened 11 basis points over the same period, according to the JPMorgan Emerging Market Bond Index.

Spending by other governments in the region and a rebound in oil prices is helping Gulf economies recover from the global economic slump even amid political unrest. Popular uprisings have toppled the leaders of Tunisia and Egypt, and unrest has spread to Yemen, Syria, Bahrain and Oman. Saudi Arabia’s King Abdullah Bin Abdulaziz Al Saud in February and March announced a $130 billion spending plan to counter the protests.

Economy

Kuwait’s economy, the third-biggest in the six-nation Gulf Cooperation Council after Saudi Arabia and the U.A.E., will expand 5.3 percent this year after growing an estimated 3.3 percent in 2010, according to forecasts from the Washington- based International Monetary Fund.

The average yield on bonds in the GCC has declined 49 basis points, or 0.49 percentage point, this year to 4.80 percent, the lowest in more than eight months, according to HSBC/NASDAQ Dubai GCC Conventional Bond Indexes.

Bank lending increased 8.1 percent in Saudi Arabia and Qatar in the six months through June. It rose 1.7 percent in the U.A.E. and declined 4.2 percent in Bahrain in the first five months. In Oman, lending rose 2.7 percent January to April.

Lending in Kuwait will “remain reasonably subdued for the rest of 2011,” Howladar at Moody’s said.

Kuwait’s investment companies accounted for about 11 percent of lending at the end of 2010, Moody’s analysts led by Howladar said in a July 6 report.

“Banks are reluctant to lend since the real-estate and investment sectors were major borrowers and these are just too risky to lend to now,” Naveed Ahmed, a banking analyst at Kuwait City-based Global Investment House KSCC (GLOBAL), said in an e- mail yesterday. “Good opportunities no longer present themselves and the risk appetite of banks has decreased.”

To contact the reporters on this story: Arif Sharif in Dubai at asharif2@bloomberg.net Fiona MacDonald in Kuwait at fmacdonald4@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net Shaji Mathew at shajimathew@bloomberg.net

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